Effect of Dividend Payments on Shareholder Fund

Asquith and Mullins carried out a study to survey the impact of initiating a dividend payment on shareholder wealth. Their main objective was to understand further the impact of dividends on shareholder wealth. The survey made use of a sample of 168 firms. The dividend has been either the first paid by the company since its initiation or a resumption of a dividend after a break of at least 10 years (Asquith & Mullins 1983). A number of studies have been carried out to understand the relationship between the payment of dividends and shareholder wealth. An example is the Modigliani and Miller theory. The theory argues that a firm’s market value is independent of its dividend policy (Villamil 2003). Black and Scholes support dividend irrelevance by stating that there is no significant relationship between dividend yields and stock return. Miller and Scholes also supported the dividend irrelevance theory by stating that even with tax differentials, there is no significant relationship between dividend payment and shareholder wealth (Watson & Head 2010).

Research conducted by Asquith and Mullins gives a contrary opinion to the relationship between dividends and shareholder wealth. The research revealed that there is a positive relationship between initial dividend payment and shareholder wealth. Their study further revealed that a consequent dividend payment has a positive impact on shareholder wealth. Their evidence offers a strong argument for the positive effect of dividend payment on shareholder wealth. Results of research can be relied on because Asquith and Mullins are renowned professors at Harvard University. Besides, their article is published in a peer-review journal. Finally, their data sample used in the review is adequate and is based on daily stock return (Asquith & Mullins 1983).

Microsoft dividend policy

Since its formation, Microsoft had not paid dividends until 2003. The company attributed its failure to pay dividends to technological novelty. The company came up with a dividend policy in 2003. From the time of the initial public offer (1986) and the first dividend payment, the company reported a robust financial performance. This was characterized by high sales, profitability, and investment in capital expenditure. The performance of the company was way above the industry averages. From 1995, the company reduced capital expenditure and started accumulating cash. This was the year of maturity of the company. The company started paying out dividends eight years after reaching the maturity stage (Microsoft Investor Relations 2012). The company’s dividend payment pattern is consistent with the life cycle theory of dividend payment. This theory opines that the “optimal dividend policy at a value-maximizing firm is to retain all earnings in the rapid growth phase and payout 100% of the earnings at maturity” (Asquith & Mullins 1983, p. 34).

The company’s dividend policy is to pay a cash dividend every quarter. The amount of dividends paid is scaled to the operating income earned. In addition, dividend policy is based on, among other considerations, “views on potential future capital requirements relating to research and development, creation and expansion of sales distribution channels, investments, and acquisitions, share dilution management, legal risks, and challenges to our business model” (Microsoft Corporation 2004). The amount of dividend paid has been on an upward trend. In addition, there has been no change in the dividend policy of the company since 2003. The dividend payment policy and pattern of Microsoft Corporation is strong observed evidence of the life cycle theory of dividend payment.


Asquith, P & Mullins, W 1983, ‘The impact of initiating dividend payments on shareholders’ wealth’, The Journal of Business, vol. 56 no. 1, pp. 77-96.

Microsoft Corporation 2004, 2004 annual report. Web.

Microsoft Investor Relations 2012, Dividend and stock history. Web.

Villamil, A 2003, The Modigliani-Miller Theorem. Web.

Watson, D & Head, A 2010, Corporate Finance: Principle and Practice, Financial Times Management, USA.

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